WS2: Corporate Personality Flashcards
Define limited liability
The idea is that all debts incurred by a company are the liability of the company and not the liability of shareholders / directors.
The company is not an agent of subscribers or members - the company ‘attains maturity at birth’.
Directors owe their duties to the company and not to shareholders.
Name the three key consequences of a company having a separate legal personality:
Company owns its own property
Company enters into its own contracts
Company sues and is sued on its own liabilities
When does a company gain a legal personality?
Date of incorporation [when Registrar issues certificate of incorporation]
What is the name of the process of the exception to the rule that shareholders’ liability is limited to any unpaid amount owed on shares?
Piercing / lifting the corporate veil.
Does the doctrine of piercing the veil exist?
Yes [Prest v Petrodel] and can be invoked on public policy grounds but only in extremely narrow circumstances where there is no alternative remedy.
When is the veil pierced?
“The court may pierce the corporate veil only where a person under an existing legal obligation or restriction deliberately evades or frustrates that obligation / restriction by setting up a company”.
How did pre-Prest case law treat the issue of piercing the veil?
Members have only ever been found liable rarely and if so, only to the extent required to right the wrong.
Pre-2013 case law: what are the statutory examples in which the veil can be lifted?
Taxation: parent companies should produce group accounts and details of names of subsidiaries and extent of holdings.
Employment: employees statutory rights continue when moving within a group of companies
Corporate insolvency: offences of fraudulent / wrongful trading can be liable to debts of insolvent company.
Pre-2013 case law: what are the common law examples where the veil can be lifted?
If a company has been set up as a facade or a sham
Parent companies are only liable for their subsidiaries in specific statutory circumstances
Agency arguments e.g. subsidiary is an agent of a parent company have been rejected.
Tort: parent companies CAN be liable to subsidiaries on the basis of tort, but this is not an example of lifting the veil.
What are the Chandler v Cape conditions for liability for tort for a parent company owing a duty of care to a subsidiary’s employees?
Both companies are in the same line of business
The parent company is a more experienced company in the industry and has a greater knowledge of the matter at hand
Subsidiary’s system of work was unsafe and parent company knew this
Parent company ought to have foreseen that the subsidiary and its employees would rely on the parent company’s superior knowledge for protection
This has also been interpreted [Lungowe v Vedanta Resources] as “parent company has intervened sufficiently in the affairs of a subsidiary company”.
In this case, relevant standards were as follows:
- Establishing groupwide control and sustainability standards
- Implementation via groupwide training
- Monitoring and enforcement
- Management agreement between parent and subsidiary
When is a duty of care imposed on a parent company?
Turns on the extent to which the parent has assumed responsibility for managing the activity of the subsidiary.
A parent company can incur a duty of care via:
- Maintaining mandatory guidelines of groupwide environmental standards and safety policies
-Parent company monitors and reports on these
-Parent company CEO has overall responsibility for implementing groupwide health and safety standards.
What was the key legal principle established by Prest v Petrodel?
The veil can only be pierced to prevent the abuse of corporate legal personality where someone deliberately frustrates the enforcement of an alternative remedy by putting a company into place.
What happens if there is another remedy available alongside piercing the veil?
The remedy of piercing the veil will be neither necessary nor available. If there is any other remedy to infer liability on shareholders available e.g. tortious liability / trust / agency.
